June 7 2024: Upward pressure from wages means inflation is proving stubborn, Germany’s central bank stated on Friday, a day after the European Central Bank (ECB) delivered its first interest rate cut since 2019.
This warning from Europe’s largest economy is likely to reinforce expectations that interest rates can only come down slowly. Although inflation has decreased from double-digit levels seen in late 2022, the “last mile” remains challenging, both in the euro zone and the United States.
“Inflation is proving to be stubborn, especially in the case of services, where strong wage growth and the resulting cost pressures are major factors,” Germany’s Bundesbank said in a twice-yearly update of its economic projections. “Negotiated wages are expected to rise particularly sharply this year,” it added.
The bank now projects inflation in Germany at 2.8% for this year, up from a 2.7% forecast six months ago, with growth expected at just 0.3%, lower than the 0.4% forecast made in December.
“While the inflation rate in Germany is continuing to decline, the pace is subdued,” Bundesbank President Joachim Nagel stated. “We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts.”
ECB policymakers were presented with increased staff forecasts for euro zone inflation this week, which is now expected to stay above the bank’s 2% target until late next year.
Slow Recovery
The German economy was the weakest among its large euro zone peers last year, as high energy costs, weak global orders, and record-high interest rates took their toll. However, German Economy Minister Robert Habeck struck a more optimistic note on Friday, saying that “if things go well,” economic growth could reach as high as 1.5% in 2025.
Speaking at an event for family-run businesses, Habeck stated that the economic challenges of the past two years—marked by a sharp rise in energy prices and high inflation due to the war in Ukraine—had been brought “under control,” which would now pave the way for growth.
Meanwhile, new data from Germany on industrial production and trade for April provided a mixed picture. While exports continued their upward trend, rising by 1.6% in April compared with the previous month, industrial production fell by 0.1% month-on-month, indicating a sluggish economic recovery. The trade surplus remained almost unchanged at 22.1 billion euros ($24.07 billion).
The data “raises fears that overall economic growth will be meager in the second quarter,” said Thomas Gitzel, chief economist at VP Bank. “Higher output in industry initially requires stronger growth in incoming orders.”
Data earlier this week showed that industrial orders also fell unexpectedly in April, marking the fourth consecutive month of decreases due to a significantly smaller number of large-scale orders.
“Yesterday’s drop in new orders as well as still high inventories show that any rebound in industrial activity will remain muted,” said Carsten Brzeski, global head of macro at ING.
($1 = 0.9181 euros)
